Tax rate’s trickle-down could wipe out smaller companies

Monday

Aug 31, 2009 at 12:01 AMAug 31, 2009 at 11:41 AM

Ken Brown doesn’t have the luxury of planning for 2010 just yet. He’s too busy wondering whether his machine shop and its dozen or so employees will be open next week and the week after that. But if Datum Machine Works can hang on until the new year, he knows another blow is looming.

Sean F. Driscoll

Ken Brown doesn’t have the luxury of planning for 2010 just yet. He’s too busy wondering whether his machine shop and its dozen or so employees will be open next week and the week after that.

But if Datum Machine Works can hang on until the new year, he knows another blow is looming. Even if the Rock River Valley’s economy starts to rebound, Datum and others will be feeling a new pinch in their pocketbooks: the state’s depleted unemployment trust fund.

The fund is in dire straits — its balance was $183 million on July 31, compared with $1.5 billion on Dec. 31 — which means employers’ contribution rates are sure to go up next year. Increases won’t be determined until later this year, but Brown knows that any increase will be a hit to the struggling company.

“It’s just a big domino effect,” Datum’s president said. “I have trouble getting paid for my invoices, and that gives me trouble paying my bills. With the unemployment rates going up, it could very well put us out of business.”

The state has borrowed $43 million from the federal government to buoy the fund, Illinois Department of Employment Security spokesman Greg Rivara said. More borrowing could be necessary this year.

John Morrissey, president of payroll firm Market Dimensions Inc., said he’s discussed the impending hike with his clients and has run some projections on what their new bills could be.

“Is it a big number? It’s probably in the neighborhood of 1 percent of total wages,” he said. “In an environment where prices aren’t going up 1 percent and inflation is essentially zero, 1 percent is kind of a big deal. Maybe I (could) eke out a 3 percent raise (for my employees), but 1 percent of that is now going to go to the state.”

The tax rate that supports the unemployment insurance trust fund is based on two primary factors: the overall health of the fund and an employer’s history with unemployment.

Figuring the rate

All firms pay to help replenish the fund; firms that have cut staff must also pay an “experience rate” based on how many of their former employees have filed unemployment claims. Both factors are determined by examining the past three fiscal years of activity.

The three-year look is designed to create a “smoothing factor,” Rivara said, to mute the effect of a particularly tough year on the fund.

“We go back three years so employers are not significantly hit for actions taken in any single year. The program is designed to collect money when times are good so that it has money available when times are challenging.”

The tax rates in 2009 were between 0.6 percent and 6.8 percent, and based on the first $12,300 paid to each employee. The 2010 rates haven’t been calculated, Rivara said, but the rate ceiling will go no higher than 7.25 percent, and the base wage will be no higher than $12,960.

As recently as 2006, the ceiling was 8.9 percent, although the base wage was only $11,000.
In November or December, the state will mail 300,000 notices to companies informing them of the 2010 tax rates. They can challenge them, but only a few hundred calculations are amended each year, Rivara said.

Smaller firms, bigger hit

Everyone’s taxes are likely to increase, but smaller companies will feel the hit more directly, Morrissey said.

“If the average wage is $70,000 or $80,000, and it’s a lawyers or a doctors group, it’s not as big a hit of the total package,” he said. “But if you have a small firm paying $25,000 or $30,000, half of each wage is taxable. That’s a bigger deal.”

Brad Bull, co-owner and chief financial officer at ATS Medical Services in Rockford, said the 60-employee company has cut costs where it can to avoid layoffs. The increased unemployment taxes won’t push the company to cut staff, but the money will have to come from somewhere.

“I’m in a thinking process about it,” he said. “I have not factored it in, but I’m definitely knocking it around. I’m not sure right now where the money will come from.”

Sandi Kohn, co-owner of MedicineMan Graphic Design Studio in downtown Rockford, is in a situation similar to Brown’s at Datum Machine Works. She has a handful of employees and is focusing more on week-to-week survival than 2010 financial planning.

“I kind of expect it, but that doesn’t mean I’ve got any money saved for it,” she said. “Everyone’s just dealing with today.”

Sean F. Driscoll can be reached at (815) 987-1346 or sdriscoll@rrstar.com.

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